Land and Buildings Transaction Tax - Additional Dwelling Supplement: call for evidence and views

4. Issues of Concern Raised

4.1 This chapter summarises and seeks views on key issues of concern for the operation of the ADS which taxpayers and stakeholders have raised to date.

4.2 It is included to help ensure that the Scottish Government obtains evidence and views on the most frequently raised points, but is not intended to be exhaustive. Respondents are invited to highlight and provided evidence on any other issues which they would like the Scottish Government to consider as part of this review.

4.3 Equally, the inclusion of any issue is not intended to signal a commitment that the Scottish Government intends to amend the legislation to address it in future.

4.4 For all issues, the Scottish Government seeks evidence of their frequency and impact, along with proposals as to how they might be addressed, whether through legislation or other measures. Further commentary on the criteria that the Scottish Government will take into account in considering calls for change is set out in chapter 5.

4.5 The issues are grouped into four broad themes:

A. The timelines for the ADS

B. Specific issues including in relation to:

• Inherited Property
• Divorce or Separation
• Joint Buyers/Economic Unit Provisions

Joint Buyer related scenarios are the most complex and can be relevant to both whether ADS is due or can be repaid.

C. Transactions involving Housing Providers

D. Exceptional Circumstances

4.6 For each issue, a reference to any relevant legislation is provided along with commentary on how this works in practice and on the concerns which have been raised. Relevant questions are then set out for consideration.

A: The Timelines for the ADS

A1: Time taken to purchase a new main residence: 18 month window

Relevant Provisions: Paragraph 2, Schedule 2A

4.7 When more than one residential property is owned at the end of the effective date of a transaction, consideration must be given as to whether a previous main residence has been "replaced".^[35]

4.8 This is covered in chapter two, but for ease of reference it requires that the ownership of a property must, among other things, have been disposed of in the 18 months prior to the relevant transaction, and that this property was used as an only or main residence at some point during that period.

4.9 This recognises that some people will sell their main residence before going on to purchase a new one. The legislation provides 18 months for the subsequent purchase, on the basis that the process of finding a new home may take time. The length of the window mirrors the length of time available to dispose of the ownership of a previous main residence after the ADS is paid, which is discussed below (see A2).

4.10 If a new main residence is purchased after 18 months then, if any other property is owned at the effective date of a new purchase, the ADS will be due, regardless of whether a new main residence is being purchased or not.

4.11 Some stakeholders have argued that 18 months is not enough in some circumstances and that the timeline should be extended, potentially to 36 months to align with the arrangements in place for SDLT and LTT.

4.12 However, aside from some concerns highlighted early in the pandemic period, no conclusive evidence has been presented as to the specific case for this.

Questions

1. Should the Scottish Government consider amending the length of time available to purchase a new main residence following the sale of a previous main residence from 18 months?

2. If so, can you provide further explanation and/or evidence regarding the circumstances in which 18 months may not be sufficient?

3. If the Scottish Government were to amend the length of time available to purchase a new main residence, what period of time should be considered and why?

A2: Disposal of a previous main residence: 18 month window

Relevant Provisions: Para 8(1), Schedule 2A

4.13 If the ADS is paid following the purchase of a new main residence, it may be reclaimed if a previous main residence is sold within 18 months of the effective date of the purchase.

4.14 As set out in chapter two, this presents a balanced approach and the current data available indicates that at least two-thirds of buyers who intend to reclaim their ADS go on to do so.

4.15 Some stakeholders have called on the Scottish Government to increase the time available for a previous main residence to be sold, and that this should ideally align with the 36 month period in place for SDLT and LTT.

4.16 The Scottish Government recognises that there may be circumstances in which sales may take longer than 18 months, particularly in relation to the specific circumstances of housing markets in remote and rural areas. However, there is a clear risk that any extension could encourage people to hold onto properties longer than would otherwise have been the case, to allow for its use as a rental property and/or in anticipation of capital appreciation over time.

4.17 As a specific issue, the Scottish Government recognises that there are unfortunate cases where taxpayers have been unable to sell a previous main residence due to issues associated, in particular, with the lending market's current approach to cladded properties, and where the 18 month repayment window has either ended, or will come to an end, before the necessary works or assessment to allow for a sale can be completed. It may be that this situation could be addressed through the introduction of an exceptional circumstances provision (please see D below).

Questions

4. Should the Scottish Government consider amending the length of time in which a previous main residence can be sold in order for a repayment of the ADS to be claimed?

5. If so, can you provide further explanation and/or evidence where 18 months may not be appropriate?

6. If the Scottish Government were to amend the length of time available to dispose of the ownership of a main residence, what period of time should be considered and why?

B: Specific Scenarios

B1. Inherited Property

Relevant Provisions: Paragraphs 12 and 14, Schedule 2A

4.18 Individuals do not pay LBTT on residential property that they inherit and no ADS will be due if this occurs. However, in determining whether or not the ADS is due, any inherited property owned is counted in calculating the overall number of dwellings owned.

4.19 The Scottish Government is aware of two separate concerns in this area.

4.20 The first occurs where individuals inherit a small share of a property which is owned jointly, for example when a group of siblings inherit a share of a property from a parent. In this instance, the deeming rules on joint ownership in the legislation mean that each person with a share in the property is treated as owning the whole of the inherited property, regardless of how small their individual share is. If the overall value of the property is £40,000 or more, then it will count as a dwelling owned by the individual for the purposes of the ADS, even if the individual share is worth less than £40,000.

4.21 Separately, some stakeholders have suggested the introduction a grace period along the lines of that in place for SDLT and LTT where the ADS would not apply for a period following an inheritance. For SDLT, where a person inherits a share of 50% or less of a residential property in the three years before the purchase of a new main residence, this can be ignored for the purposes of the higher rates if: the beneficiary became a joint owner of the interest by inheritance; and the beneficiary and any spouse or civil partner's combined interest has not exceeded half of the major interest in the three years before the effective date of the chargeable transaction.

4.22 The Scottish Government seeks views on the case for introducing a similar, or more targeted, arrangement for LBTT. One approach in this regard might be to consider situations where a buyer inherits a property after missives have been signed for the purchase of a new main residence.

Questions

7. What circumstances and issues should the Scottish Government take into account in considering the treatment of low value interests in inherited properties for the purposes of LBTT?

8. Should the Scottish Government consider the introduction of a grace period along the lines of that in place for SDLT in respect of inherited property? If so, what arrangements should be considered?

B2: Divorce or Separation

Relevant Provisions: Paragraph 6, Schedule 2A

4.23 The economic unit provisions referred to in 2.11 – 2.12 do not apply if a couple have separated.^[36] For the purposes of the ADS, individuals have separated if they no longer live together and they do not intend to live together again. This means that residential property owned wholly (rather than jointly) by a former partner does not count for the purposes of calculating the number of residential properties owned.

4.24 All other legislative arrangements for the ADS apply as normal however. As such, if a share continues to be owned in the former marital or shared home it will count as an owned property.

4.25 Some stakeholders have argued that an exception should be made in these circumstances, particularly where children are involved, such that the ADS would not be due when a new main residence is purchased following divorce or separation.

4.26 A change along these lines would however create an obvious difference in treatment for certain buyers, allowing more than one property to be owned – albeit in specific circumstances – without the ADS being due.

4.27 As a more specific approach, the Scottish Government notes that the SDLT legislation includes provisions to address a scenario where a divorcée or ex-civil partner is required by court order to retain an interest in a former home.^[37]

Questions

9. What circumstances and issues should the Scottish Government take into account in considering the tax treatment of a new property purchased following a divorce or separation, and why?

10. Do you have views on the case for a more specific legislative amendment along the lines of that available in SDLT? If so, please provide further details.

11. Separately, would increasing the length of time available to dispose of a main residence (see A2) assist in situations of divorce or separation?

B3. Joint Buyers/Economic Unit Provisions

Relevant Provisions: Section 48, Paragraph 6 and 8A, Schedule 2A,

4.28 There are many situations where two or more people may own or buy a property together. Stakeholders and taxpayers have indicated that, where this occurs and more than one property is owned at the relevant effective date, additional complexity may exist for the ADS.

4.29 A particular concern expressed, and discussed earlier in this document, is that while one of the buyers can determine whether the ADS is due in the first instance^[38] both buyers must meet the requirements in order for the ADS to be repaid.

4.30 This means, for example, that the disposal of the ownership of a previous main residence by one party does not count as a disposal by the other if they had not lived in that property as their main residence (taking into account the provisions at 8A and 9A of Schedule 2A discussed earlier in this document).

4.31 The joint buyer scenario most frequently raised with the Scottish Government is highlighted below, using "A" and "B" to illustrate the two buyers. To aid understanding, a relevant Revenue Scotland worked example is also provided.

4.32 The Scottish Government recognises that there are various other scenarios involving joint buyers where the application of the ADS legislation may cause concern and seeks views and evidence on these.

Repayment of ADS not available following sale of only one buyer's previous main residence

• A and B purchase a property together, but do not currently live together.
• A owns a main residence, but B does not own any other property.
• A does not sell the main residence before the effective date of the transaction for the joint property.
• A and B must pay the ADS as more than one property is owned and a main residence has not been replaced.
• A and B cannot reclaim the ADS even if A's previous main residence is sold as they do not both meet the conditions at Paragraph 8(1)(b) (as B never lived in A's property as their main residence) -a condition that needs to be satisfied by virtue of Paragraph 8A(2)(b).

Revenue Scotland Worked Example^[39]

Rebecca owns her current main residence and she will be buying a new main residence with her partner, Owen, who currently lives in separate rented accommodation.

Rebecca cannot sell her previous main residence before her joint purchase of her new main residence with Owen. Therefore at the end of the day that is the effective date of the transaction, Rebecca and Owen own or are deemed to own one or more dwellings, and as they have not replaced their main residence the ADS will apply.

Rebecca sells her previous main residence three months later and they now wish to claim a repayment of the ADS. However, as both buyers did not occupy that property as their previous main residence, Schedule 2A, paragraph 8A of the Act does not apply and as such repayment of the ADS cannot be claimed.

4.33 In this instance, the final outcome in terms of the legislation is the same as it would be if B (Owen in the example above) does own another property, such as a buy to let property, which does not qualify as a previous main residence, and did not sell this prior to the end of the effective date of the purchase of the new main residence.

4.34 The same situation applies if both buyers had each owned a property, but only one of them sold their only or main residence by the end of the effective date.

Questions

12. Are there other issues of concern regarding the treatment of joint buyers which the Scottish Government should consider? If so, can you provide further explanation and evidence regarding these?

13. Do you have any proposals as to how the legislation might be amended in response to these scenarios, in a way that would ensure consistency with the application of the ADS for an individual buyer?

C: Transactions Involving Housing Providers

C1. Transactions involving Local Authorities – Affordable Housing

Relevant Provisions: Schedule 6 and Schedule 15

4.35 At present, a relief is provided from LBTT for Local Authorities when a transaction occurs in order to comply with a planning obligation or a modification of a planning obligation. For the purposes of the legislation, this means an agreement made under section 75 of the Town and Country Planning (Scotland) Act 1997.

4.36 In addition, Schedule 14 of the Act provides relief for certain compulsory purchases by local authorities. As with all transactions, full relief from the ADS is also available where six or more residential properties are acquired in a single transaction.

4.37 It has been highlighted that this arrangement means that LBTT, in particular the ADS, may be due in a range of potential scenarios where properties are purchased by local authorities in order to provide affordable housing. This includes, for example, the purchase of "off the shelf" properties from home builders.

4.38 Concerns have been expressed that this results in differential treatment relative to housing associations. In this regard, Schedule 6 of the Act provides for relief from LBTT for a land transaction that is partially or fully funded by public subsidy, where the buyer is a Registered Social Landlord and where one or more of the relevant qualifying conditions are met. This means that Registered Social Landlords are relieved from LBTT when buying land or property associated with the delivery of affordable homes.

Questions

14. What circumstances should the Scottish Government consider in assessing the case for a broader relief for local authorities where properties are acquired for affordable housing purposes, and why?

C2. Housing Co-operatives and other approaches

4.39 The Scottish Government is aware that different approaches may be used to support the delivery of housing that is intended to be affordable, and that concerns have been expressed recently about the application of the ADS in relation to housing co-operatives.

4.40 The Scottish Government announced in the Programme for Government 2021-22 an intention to "…explore ways in which we can provide further support for housing cooperatives, including potentially through LBTT relief".

4.41 Views are accordingly sought on the case for changes to be made to the legislation as it applies to housing co-operatives. Views are also welcome on the treatment of any other form of affordable housing provision not otherwise covered in this document.

4.42 As context, the UK Government made changes to the tax treatment of housing co-operatives in Finance Act 2021.^[40] This relieved qualifying co-operatives from the 15% flat rate of SDLT, which does not exist within the LBTT arrangements in Scotland. The HMRC guidance notes that SDLT will instead be charged at the higher rates which apply to dwellings purchased by companies. In addition, relief was provided from the Annual Tax on Enveloped Dwellings (ATED),^[41] which applies throughout the UK.

Questions

15. Are there grounds for the Scottish Government to consider the introduction of a relief from the ADS for housing co-operatives, or any other approaches intended to deliver housing which is affordable? Please provide further explanation and evidence regarding this.

D. Exceptional Circumstances

4.43 The Scottish Government recognises that very exceptional events and circumstances may arise that are beyond the taxpayer's control, and which may prevent them from satisfying the conditions in the ADS legislation. As an example, issues around cladding are highlighted in paragraph 4.17.

4.44 At present, the legislation does not provide Revenue Scotland with any discretion to not apply the ADS provisions in the event that circumstances which they would agree are exceptional occur.

4.45 For SDLT HRAD a legislative provision is in place,^[42] and HMRC has also published guidance,^[43] on exceptional circumstances for claiming an SDLT refund outside of the normal time limits. This followed a written statement from the then Financial Secretary to the Treasury, in the context of the impact of the pandemic on the housing market. The HMRC guidance notes that where a purchaser acquires a new main residence on or after 1 January 2017, they may still be eligible for a refund if exceptional circumstances prevented them from selling their previous main residence before the expiry of the 3-year time limit that applies in SDLT. The previous main residence must be sold before HMRC will consider whether the circumstances are exceptional.

4.46 Separately, the Welsh Minister for Finance and Local Government released a written statement on 16 November 2021,^[44] stating an intention to bring forward legislation in due course that will allow taxpayers to claim a refund of the higher rates of LTT "….where they are replacing their main residence and have sold their previous main residence more than three years after purchasing the new property, if truly exceptional circumstances related to issues with unsafe cladding prevented the sale being completed more quickly."

4.47 Views are sought as to whether the Scottish Government should consider legislating to provide Revenue Scotland with a discretionary power to disapply the ADS provisions in response to truly exceptional circumstances, whether in relation to the specific issue of cladding, or in other areas that raise similar issues, where this might be considered appropriate.

Questions

16. Is there a case for the Scottish Government to consider legislating for an exceptional circumstances provision along the lines discussed above?

17. If so, what circumstances should be considered, and on what grounds?